New York Pension Deal May Deserve One or Two Cheers

The blogosphere and some of the MSM have been up in arms about the scheme described in the New York Times in State Plan Makes Fund Both Borrower and Lender. Here are the basics, from that article:

Gov. David A. Paterson and legislative leaders have tentatively agreed to allow the state and municipalities to borrow nearly $6 billion to help them make their required annual payments to the state pension fund.

And, in classic budgetary sleight-of-hand, they will borrow the money to make the payments to the pension fund — from the same pension fund.

This maneuver is being portrayed as a Ponzi and idiotic. Actually, it could have been worse. The state could have tried to borrow through a general obligation municipal offering to fund its payment.

Perhaps what we are actually seeing deserves a cheer or two. The pension fund may be acknowledging that the state cannot afford at this time to make its contribution, so with the fig leaf of the above circular financing, the pension fund is allowing the state to "pass" this year and hope for better times.

Now, if this were the Federal government with a compliant central bank, the temptation to print/borrow money to fund the shortfall would have been much greater.

New York State's "operating funds budget" is around $80 B annually, which based on a population of about 20 million comes to state spending of about $4000 per person annually. Thus the state spends $16,000 for each family of four people.

Ultimately each State is going to have to rationalize its flow of resources. Just as labor can flow between states if one state taxes too heavily, so eventually even the United States will have to continue to make itself attractive to its own people and to the foreigners it has been taking in for decades, both the highly educated and the manual laborers alike.

It may just be that the powers that be in New York State have kicked the can down the road in what in essence is a "not so bad" deal, odd though it looks at first glance. Taxes do not rise and neither do net borrowing costs.

This may foreshadow similar issues nationally, such as with Treasury bonds held by the Social Security Administration.

This does not smell like a one-off situation.

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